Traders to look to last Federal Reserve meeting to gauge where stimulus heading

CP

TORONTO - The U.S. Federal Reserve will remain the focus of investors this week amid a shortage of market-moving economic data and as corporate earnings from the third quarter slow to a trickle.

Of particular interest will be the release Wednesday of the minutes from the latest Federal Reserve meeting late last month when the central bank judged the American economy still too weak to start tapering its key stimulus program, the monthly purchase of US$85 billion of bonds.

But the meeting did nothing to lessen the uncertainty surrounding when the Fed might move, particularly as its sounded more positive about the economy.

"The overall view after the last meeting in October was that the Fed actually came out a bit less concerned about the economy than I think most had expected," said Doug Porter, chief economist at BMO Capital Markets.

"I guess people were expecting some dovish remarks and, if anything, they sounded more comfortable with the economic backdrop."

There is a lot of unease about the prospect of the Fed tapering its bond purchases because this latest round of quantitative easing has kept long-term rates low and encouraged more people to invest in equity markets. The U.S. market has been a huge beneficiary of Fed stimulus, with the Dow industrials up over 20 per cent year to date.

Both the Toronto and New York markets advanced last week, with the TSX ahead 0.8 per cent and the Dow industrials ahead 1.27 per cent.

The gains reflected a comment by Fed chair-designate Janet Yellen that while the central bank appreciates the stimulus program can't go on forever, "it is important not to remove support while the recovery is still fragile."

But "it is also important to remove accommodation when the right time comes," Yellen told the Senate banking committee.

Porter thinks that the minutes from the October meeting will give an indication of whether the Fed was "as comfortable with the economic outlook as it was in the press statement."

They will also tell markets how divided members of the Federal Open Market Committee are in carrying on with the asset purchases.

It's a soft week for economic data but the Canadian dollar could find some lift from the latest retail and inflation data coming out near the end of the week.

Porter noted that retail sales have actually been relatively stable in recent months.

"From what we’ve seen in auto sales, which were quite strong in the fall, and then home sales were quite strong as well, there’s little sign that the consumer is throwing in the towel," Porter said.

"It seems like Canadian consumer spending is hanging in there."

Economists reckon that retail sales rose by 0.2 per cent in October following a 0.2 per cent gain in September.

Traders will also take in data that will likely show very little price pressure in the Canadian economy.

"I think . . . one of the big stories, not just in Canada but across the industrialized world, is just how modest inflation is," Porter said, noting that falling gasoline and food prices are helping to keep the lid on inflation.

"I wouldn’t be shocked if overall inflation dropped below one per cent (annualized) on the month."

The consensus calls for the consumer price index to come in unchanged for October after rising by 0.2 per cent in September.

In the U.S., investors will look to the release of the latest data on retail sales, inflation and existing home sales on Wednesday. Traders will also look to Thursday, when the leading indicator comes out. This report tells investors how the economy should be performing in the next six months.

On the earnings front, investors will take in reports from retailer Sears Canada (TSX:SCC) and food company George Weston (TSX:WN) on Tuesday, specialty drug company Paladin Labs (TSX:PLD) on Wednesday and Gildan Active Wear (TSX:GIL) on Thursday.